Paying for performance (P4P) has strong intuitive appeal. Common sense and rigorous studies tell us that paying more for, say, angioplasties or immunizations yields more of them. So paying doctors and hospitals for better care, not just more of it, seems like a no-brainer. Yet while Medicare and many private insurers are charging ahead with pay-for-performance (P4P), researchers have been unable to show that it benefits patients.

Findings from the new field of behavioral economics may explain these negative results. They challenge the traditional economic view that monetary reward is either the only motivator or is simply additive to intrinsic motivators such as purpose or altruism. Studies have shown that monetary rewards can undermine motivation and worsen performance on cognitively complex and intrinsically rewarding work, suggesting that P4P may backfire.

There are a number of things in the piece worth noting. The first is that there have been not one, but two Cochrane reviews on this topic. The first found that financial incentives might work to change some of the processes of care, but there was nothing to support the idea that financial incentives would improve outcomes. The second found that evidence showing financial incentives worked in primary care was also lacking.

Traditionally, economists have viewed extrinsic (i.e. monetary) reward as either the only motivator (Figure 1a), or as simply additive to intrinsic motivators such as purpose, altruism, mastery, or autonomy (Figure 1b). According to this view, higher pay induces better performance. (Figures appear at the end of this post.)

But this simple model of reward-induced performance ignores the complexity of human drive, particularly the role of intrinsic motivation — the desire to perform an activity for its own inherent rewards. Offering your dinner party host a $10 reward for cooking a wonderful meal isn’t likely to motivate future invitations.

In last week’s post, we saw that there were improvements long before pay for performance (or penalties for not performing) kicked in. Once they did, improvements slowed. The authors of this piece would likely argue that the program hurt things more than it helped. I don’t know if that’s true, but it’s worth thinking about.

Good for you, Aaron! It is hard to go against the tide, but your skepticism is well-warranted.

My own view is ideas like this work reasonably well in the market place, but fail when the bureaucracy tries to replicate them. I would gladly pay more to see a Doc with 20 years of experience than a kid just out of Med school. It makes no sense to me to pay all physicians at the same rate — but how will a committee in Washington make appropriate distinctions?

Consider buying a car. What price would a P4P committee put on a Lexus versus a Kia?

Plus there are intangibles that are essential to a successful medical encounter — trust, respect, affability, etc. — that go beyond mere mechanics. These are usually dismissed as “bed side manner” by people who have never actually been in the bed.

Whenever I read about performance pay, my mind goes immediately to the concept of risk averse preferences. Performance pay inherently increases income volatility–aka risk–and if workers are risk-averse, this means we will have to increase workers’ average pay. I tend to think this effect is quite substantial, based on the real world observation that almost no one in the economy is paid on a performance basis–most people get a salary or wages, which are not performance based.

The point is, to really support the idea of performance pay, you have to prove that not only is there a moral hazard problem when worker’s incomes aren’t tied to performance, but that the costs incurred by this problem are bigger than the risk premiums workers will demand, plus the cost of actually measuring output, which is hard in service based occupations.